Four essays in international macroeconomics

Jiang, Shifu (2018) Four essays in international macroeconomics. PhD thesis, University of Glasgow.

Abstract

Chapter 1: We propose an integral correction mechanism to model real exchange rate dynamics. In estimation, we also allow a Harrod-Balassa-Samuelson effect on real exchange rate long-run equilibrium. Using data from 19 OECD countries, we find the integral correction mechanism fitting in-sample data significantly better than the popular smooth transition autoregression model. The special dynamics of the integral correction mechanism help explain the PPP puzzle by distinguishing mean-reversion speeds in the long- and short- run. However, the integral correction mechanism shows a significant out-of-sample forecast gain over the random walk in only few cases. Though the gain is robust across forecast horizons and quite large at long horizons.

Chapter 2: This chapter evaluates the ability of a standard IRBC model augmented with an input adjustment cost of imported goods to explain different aspects of the real exchange rate like the standard deviation, the autocorrelation function, the spectrum and the integral correction mechanism. I find that the simple IRBC model with an appropriate calibration can well capture all features of the real exchange rate. The input adjustment cost plays the key role. As compared to the standard model, it implies a reversed impulse response of the real exchange rate with a fast speed going back to steady state and introduces a long-run cyclical movement in most macroeconomic variables. I find that this particular impulse response helps explain the PPP puzzle.

Chapter 3: I study optimal unconventional monetary policy under commitment in a two-country model where domestic policy entails larger spillovers to foreign countries. Equity injections into financial intermediaries turn out to be more efficient than discount window lending and the large-scale asset purchases that have been employed in many countries. Due to precautionary effects of future crises, a central bank should exit from its policy more slowly than the speed of deleveraging in the financial sector. The optimal policy can be changed considerably if cross-country policy cooperation is not imposed. In this case, interventions tend to be too strong in one country but too weak in the other. Gains from cooperation become positive if using unconventional monetary policy is costly enough, then correlates positively with the cost.

Chapter 4: I consider the implementation of optimal unconventional monetary policy outlined in chapter 3. I find the Ramsey policy characterised by a simple rules responding to gaps in asset prices. However, it requires knowledge of asset prices that would be realized in a world free of financial friction so cannot be used to guide unconventional monetary policy in practice. The best practical simple rule responds to credit spread with inertia.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Subjects: H Social Sciences > HA Statistics; H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Dennis, Professor Richard
• Date of Award: 2018
• Depositing User: Mrs Marie Cairney
• Unique ID: glathesis:2018-30605
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 05 Jun 2018 08:12
• Last Modified: 31 Jul 2018 15:50
• URI: https://theses.gla.ac.uk/id/eprint/30605